The Perfect Storm

The intensifying economic crisis slams the world of nonprofit organizations.

By

March 11, 2009

In the days between Christmas and New Year’s Eve, Anthony Romero, executive director of the American Civil Liberties Union, sat at his desk in Lower Manhattan and reached out to people who had lavished generous donations on his organization during the long, benighted tenure of George W. Bush. It was a heady moment: the era of Dick Cheney, John Ashcroft and Alberto Gonzales was winding to a close, and Barack Obama was about to assume office, having vowed to rescind some of his predecessor’s more egregious assaults on civil liberties.

But Romero wasn’t phoning his supporters to share the joy–he was calling to plead for cash after a season (actually, several seasons) of thwarted solicitations. Throughout the spring and summer, would-be donors had explained, over and over again, that they were too busy writing checks to the Obama campaign. By the time Obama mounted the stage to deliver his acceptance speech in Chicago on election night, many had become preoccupied with something else: the implosion of the economy. As Romero worked the phone from his office on the nineteenth floor of the downtown high-rise, around the corner from the New York Stock Exchange, he could feel the aftershocks of the collapse.

“I’ll come back, but I lost it all,” one longtime donor told Romero.

“I love you guys, but it’s gone–all gone,” said another.

The most expensive presidential campaign in history and the cataclysmic financial meltdown of the past few months combined to produce a “perfect storm,” Romero told me recently. The storm blew a $19 million hole in the ACLU’s budget, resulting in a hiring freeze and the cancellation of various projects, followed by the announcement, in January, that 10 percent of the national staff was being let go. Employees with decades of experience were told to clear out their offices; no department was left unscathed.

Founded in 1920, the ACLU boasts a membership of 530,000 and assets of more than $200 million. However dire the economic downturn gets, Romero, who has weathered his share of controversy at the ACLU but also presided over a period of impressive achievements and growth, can rest assured his organization will be around in a couple of years. It’s an assumption a growing number of his peers in the nonprofit world can’t make. At a forum in New York City in November, Paul Light, a professor of public service at New York University, predicted that “at a minimum” more than 100,000 nonprofit organizations would be wiped out in the next two years. Light asked the audience members whether any of them had tuned in to the recent hearing in Washington on the impending nonprofit upheaval. The room fell silent. Light then admitted he’d missed the deliberations as well, because, alas, there hadn’t been any. “We should demand a hearing immediately on the state of the nonprofit sector–immediately,” he declared.

Not everyone believes the fallout will be quite so cataclysmic–historically, the nonprofit sector has proved surprisingly resilient, even growing during some recent recessions–but the scale and scope of the current downturn is clearly different. And its reverberations will likely extend far beyond the world of high-profile advocacy organizations like the ACLU. From the arts to education, soup kitchens to housing organizations, nonprofits perform an array of functions that shape the texture of daily life in communities across the country, often by helping people whose situations were precarious even before the economy crashed. Now, with foundations watching their endowments shrivel, many individual donors maxed out and states across the country staring at massive budget deficits, nonprofits are scaling back their services at the very moment when the need for them is escalating.

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The Greater Hartford Legal Aid agency occupies the third floor of a boxy glass-and-concrete building a few blocks down from the University of Connecticut School of Law. Its executive director, Elam Lantz Jr., doesn’t like to talk about the ripple effects that the financial crisis has had on his agency. “I would not use the word ‘ripple’–it’s more like a tsunami,” Lantz, a mild-mannered man with a clipped gray beard and wire-frame glasses, tells me. “It’s more dire than it’s ever been–this is a sharp plummet, not a decline.”

The main cause of the sharp plummet is a seemingly unrelated development–the decline in interest rates to near zero–that has taken a disastrous toll on legal aid organizations, which, in Connecticut and many other states, receive a substantial share of their funding from the interest on temporary trusts that lawyers hold for clients while carrying out transactions such as real estate deals. This might seem like an odd way to finance such an essential social good, and it is, but the evisceration during the Reagan era of the Legal Services Corporation, the federal agency created in the 1970s to fund legal aid programs and a longstanding target of Republicans, forced states to find creative alternatives. Back when interest rates were 3 to 4 percent, the creativity seemed to be paying off. Now that they’ve nose-dived, agencies from Ohio to Oregon are scrambling to survive. In Connecticut, the interest on lawyer trusts generated $21 million in 2007; the figure will plunge to under $4 million this year. At Greater Hartford Legal Aid, six attorneys have been let go and more cuts may soon follow. “I have to raise $500,000 somehow,” says Lantz glumly, “and then spend some of our operating reserves. That will take us to 2010, and we’re just going to have to take it one year at a time.”

All this means an already overburdened legal aid system will be that much less likely to help people like Evelyn Colon. A single mother with two young daughters, last year Colon dialed the 800 number in Connecticut that refers low-income residents to attorneys who might be willing to represent them. Colon had just received an eviction notice, even though she’d kept up with her rent, after her landlord’s property went into foreclosure. Her case fell to Stephanie D’Ambrose, an attorney at Greater Hartford Legal Aid. D’Ambrose discovered that the author of the eviction notice, Fannie Mae, which weeks earlier had been bailed out by the government, was obligated to treat renters more leniently under the terms of the conservatorship it had entered. After the Hartford Courant ran a story about the case, calls began pouring in from lawyers across the country representing people in similar situations. The mounting legal challenges eventually prompted Fannie Mae to announce a moratorium on all post-foreclosure evictions. At the time, there were 10,000 such cases pending nationwide.

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D’Ambrose, a former Peace Corps volunteer whose desk is cluttered with manila folders and thank-you cards from various clients she’s served, beams with pride when talking about the case. But she hasn’t had much time to savor her success: she is among the lawyers at Greater Hartford Legal Aid who were recently laid off, and she is searching for work while trying to stomach leaving an agency swamped with need. “We already turn away a lot of people; now we’ll turn away that many more,” she says.

Unlike D’Ambrose, Sudha Acharya, executive director of the South Asian Council for Social Services, hasn’t had to thumb through any help-wanted ads lately. She’s just taken a 50 percent pay cut that, along with a 15 percent cut imposed on her staff, has enabled her agency to keep its doors open, for now. Located on the ground floor of a brick building on a noisy commercial drag in Flushing, Queens, SACSS is the sort of agency most at risk of not making it through the downturn: a shoestring operation that could disappear tomorrow with few people noticing, save for the hundreds of South Asian immigrants who rely on it for job training courses and healthcare workshops that help clients navigate a byzantine system even many native New Yorkers find impenetrable. (Among people in the state without health benefits, fully half are eligible but either don’t know they are or can’t figure out how to apply.)

Acharya says her organization stays afloat on a mix of foundation support, corporate donations, individual contributions and community funds but is seeing money from all sources dry up. The agency recently had to scrap an English-language class it had been offering in the Bronx; it has kept other services intact despite receiving no money for them. I ask her who else in her circles is feeling strained. “Everybody,” she says with a sigh. One of the groups with which Acharya’s agency partners is the Community Service Society (CSS) of New York, a 160-year-old advocacy and direct service organization for low-income residents. Its president, David Jones, describes the forces that are making the work of charitable groups like his seem like an increasingly Sisyphean task: on the one hand, cash-strapped cities and states slashing programs; on the other, private foundations reducing outlays by as much or more. Jones’s colleague Frank Kortright works with a network of nonprofits that help tenants in New York City avoid eviction. The network has been fielding more and more calls lately from high-income residents it rarely heard from in the past. Yet CSS recently had its city funding sliced in half. Jones says similar cuts are “in the offing” from foundations. He sits on the board of one that “just voted for a 60 percent cut in their amounts.”

Some of the losses that soup kitchens, homeless shelters and job training centers are experiencing may soon be offset as money from the stimulus bill trickles down from Washington to agencies that contract with state and local government, says Lester Salamon, director of the Center for Civil Society Studies at Johns Hopkins University. But the relief won’t spread to everyone: cultural institutions such as museums and orchestras rely mainly on charitable donations and the sale of tickets and subscriptions. Many are canceling exhibits and shows. The situation is similarly dire for advocacy organizations that don’t take government money and are now competing for a limited–in some cases, nonexistent–pool of funds. A few months ago, Madeline deLone, director of the Innocence Project, which has pioneered the use of DNA technology to overturn wrongful convictions, was sitting in a meeting when her communications director burst through the door. It was mid-December, and the details of Bernard Madoff’s spectacular $50 billion Ponzi scheme were just coming to light. On the phone was a reporter who wanted the Innocence Project’s reaction to the revelation that among Madoff’s victims was the JEHT Foundation, a leading funder of criminal justice reform. The news was a surprise to deLone, who rushed to her computer, clicked on an e-mail that had landed in her in-box that morning and learned that nearly half the Innocence Project’s foundation support–12 percent of its overall budget–was gone. With it went the possibility that some prisoners serving time for crimes they did not commit would ever get the chance to prove it. “What we do is DNA testing, and many states don’t have evidence-retention statutes,” says deLone, “so the longer it takes for us to get to cases, the less likely the evidence will be there. Clearly, there will be cases where the biological evidence we could have tested will be destroyed between today and the time we can get to the case.”

Elisa Massimino, executive director of Human Rights First, learned about the collapse of JEHT a few days after receiving a multiyear, $2.4 million grant from the foundation. “It was an earthquake,” she tells me. Days later came the equally jolting news that the Picower Foundation, with an endowment of $1 billion, was also shutting down, likewise courtesy of Madoff. It had just pledged $250,000 to Human Rights First to fund a program for indigent refugees seeking asylum. “We’re not disappearing, but we’ve got to find a way to do more with less,” says Massimino. “Every organization I’ve talked to is going through this.”

Thanks to the transformation of the political landscape, the work of many liberal advocacy groups has lately become easier. As the ACLU’s Romero puts it, “Ashcroft never met with me; [Attorney General Michael] Mukasey never met with me.” Now, he says, “the lines are hugely open…it’s night and day.” On the other hand, to the extent that their voices are muted because of a lack of resources, advocates of progressive change risk missing an opportunity that might not come around again. This is the concern of Gara LaMarche, head of The Atlantic Philanthropies, one of the largest, most socially progressive foundations in the country. LaMarche cites healthcare as an example. “If healthcare reform is going to pass, it will probably be this year,” he says. “Healthcare is not something you can say, ‘OK, it’s a bad year; we’ll put it off until 2010 or 2011′–it’s now or never.” On this and a host of other issues, the early months of the Obama administration are likely to be critical, which is why, despite losses suffered by his foundation’s endowment, LaMarche plans to increase giving in the short term and to lend support to advocacy organizations reeling from the collapse of other foundations. As part of this effort, The Atlantic Philanthropies and the Open Society Institute agreed in December to match donations made by members of MoveOn.org to four groups–Human Rights Watch, the Center for Constitutional Rights, the Brennan Center for Justice and the Advancement Project–that had lost money through investment funds Madoff controlled.

The initiative, which raised $1.2 million, could inspire similar collaborations, though it just as easily may not. The Atlantic Philanthropies is a “spend down” foundation whose mandate is to give away all its assets by 2018. The Open Society Institute is the philanthropic arm of billionaire financier George Soros. Neither operates off an asset base designed to last in perpetuity, as is the case with many foundations that have seen their endowments shrink by 20 to 30 percent over the past few months. Some of these foundations are calling for the creation of a revolving-loans fund, backed by the government, that would provide urgently needed capital to social service and cultural institutions they can’t support. Among the speakers at a recent Congressional briefing where this idea was aired was Diana Aviv, president of the Independent Sector, a coalition of foundations and charities, and Ford Bell, president of the American Association of Museums.

At a time when taxpayer dollars have been showered on banks, such a fund seems like the least the government could do for a sector whose leaders did not push for reckless deregulation or pay themselves exorbitant bonuses in recent years. But others argue that the responsibility for supporting endangered nonprofits should fall to foundations, which still command billions of dollars in assets and are accorded nonprofit status in part because it is assumed that self-preservation is not their primary goal. “Large institutions have choices,” says Rick Cohen, former head of the National Committee for Responsive Philanthropy. “Do they husband their resources for their own purposes, or do they say, ‘At this time we are called on to do more’? As social institutions, aren’t they obligated to step up to the plate?”

Pablo Eisenberg, a professor at Georgetown University and columnist for The Chronicle of Philanthropy, echoes this view, pointing to Bill Gates. “In his recent letter, Gates said he’s going to increase his giving to 7 percent of net returns,” says Eisenberg, “yet the foundation world opposes mandating that everyone must give at least 6 percent because they have to exist in perpetuity. Says who? The frontline defense of nonprofits should be foundations that support nonprofits.”

Some prominent foundations are heeding these calls. The MacArthur Foundation has disbursed $68 million in emergency grants to mitigate the subprime mortgage crisis in Chicago, boosted funding for the arts and front-loaded donations to human rights organizations even as its endowment has been depleted, a response Jonathan Fanton, its president, declines to depict as outsize in its generosity. “In 2003 we had about $3.8 billion in assets,” Fanton tells me. “We got up to nearly $7 billion, and now we’re at $5.2 billion. So the endowment is off maybe 20 percent, but if you see a starting point of 3.8 and you’re now at 5.2, you don’t feel so poor.”

“We’re giving back some of the extraordinary gains we earned,” he continues, “and I think it’s important for some institutions to hold steady and say, ‘You can count on us; we’re not going to reduce our investment in human rights, affordable housing, all the rest.’ Maybe if other foundations did the same, it would begin to ease the fear and panic.”

Some fallout in the nonprofit sector may be inevitable. And there may even be some benefit in forcing grant recipients to think hard about how to use their resources, a question that was easy to put off when the inflated stock market caused the level of giving to swell. Nonprofit agencies love to portray themselves as mission-driven operations staffed by underpaid idealists who never think about themselves, but the field also has its share of organizations that lack a clear mission and sometimes seem more concerned with burnishing their image than advancing social change or meeting their clients’ needs. If such groups are forced to rethink their priorities or close their doors, it might not be a bad thing. “Has there been a nonprofit bubble along the lines of the market bubble?” asks Gara LaMarche. “Probably, and it’s beginning to burst. Are there too many small groups? Are the bigger groups as creative and intelligent with their resources as they could be? Do turf issues tend to get in the way of joint ventures? These conversations may be driven by crisis, but out of it could come some more effective ways of doing things.”

There is another question people tend to put off when too much money is swishing around–namely, how much even a wealthy society like the United States can realistically expect of the nonprofit sector. Few politicians in recent years issued warnings about the danger of relying too much on private charities to help the poor–these charities were, after all, the widely heralded alternative to the welfare system, whose defects came to represent the evils of big government. But today, the number of Americans receiving cash assistance through what remains of the welfare system has fallen to a forty-year low despite spiraling unemployment, a disparity that prompted Ron Haskins, a former Republican Congressional aide who helped craft the welfare reform law, to tell the New York Times that even he has become “concerned.” The Times story appeared the day I met with David Jones of the Community Service Society, who shared this concern but was not surprised. “Responsibility for the poor was a government function in the Great Depression and Roosevelt’s time,” said Jones. “Now more and more people who lose their jobs turn to charity because we’ve off-loaded the responsibility to not-for-profits and made it so difficult and cumbersome for people to receive benefits.”

A few days after I saw Jones, I spoke to Doris Koo, president of Enterprise Community Partners, a nonprofit that provides development capital and expertise to help build affordable low-income housing. Until the Reagan era, this, too, had been a responsibility of government. As funding for public housing dwindled, an alternative system of tax credits was established that offered investors incentives to float capital to nonprofit developers constructing housing for the poor. A $9 billion industry quietly arose that has poured the concrete, hung the drywall and placed hundreds of thousands of tenants in decentralized low-income housing units, hardly enough to meet the overall demand but a significant achievement that many view as an improvement over the large, crime-infested projects that used to be the only option for the poor.

Last year, however, the flow of capital suddenly dried up, turning a $9 billion industry into a $4 billion one and leaving nonprofit developers with half-finished projects that are in limbo. “What we’ve got are these diligent community-based organizations in New Orleans, Harlem and the Bronx that are in a twilight zone situation,” said Koo. “They have a debt obligation, and they’ve acquired land that can produce no income because they can’t finish the project–there’s zero capital.”

“So groups are panicking,” she went on. “Some are coming to us to ask for extensions on loans, some are selling anything they can to raise capital to finish their projects–many of which are shovel-ready–and some have gone under.” The story illustrates how much community-based nonprofits can achieve, but also how vulnerable they can be to the vagaries of the market. What might save some of those shovel-ready projects? As it happens, $2.25 billion will soon begin flowing to states through something called the HOME Investment Partnerships Program, which draws its funding from a much-vilified source that many bankers and investors have lately come to view in a more positive light: the federal government.